- South Korea’s new crypto bill is a response to the Terra Luna collapse.
- The landmark legislation imposes steep penalties for transgressions.
- The legislation requires digital asset companies to take steps to ensure user funds.
The collapse of Terra-Luna, a South Korean-based stablecoin firm, took the country by surprise. Millions of South Koreans lost money in the exchange, prompting the government to act.
In response to the Terra Luna crisis, the government took comprehensive legal action. The new standalone crypto bill highlights the country’s commitment to creating a safer environment for crypto investors.
South Korea’s Response to the Terra Luna Collapse
On June 30, 2023, South Korea’s Parliament passed the Virtual Asset User Protection bill. This move is in direct response to the collapse of Terra Luna, which wiped out $40 billion from the crypto space.
This legislation aims to provide a safety net for investors and ensure that digital asset companies operate responsibly. For instance, the new law requires digital asset companies to insure customer funds and maintain a certain reserve capital.
The bill also unifies nineteen crypto-related bills developed to define crypto assets and impose penalties for transgressions. According to the government, the move aims at creating a more secure and reliable crypto environment in South Korea.
South Korea’s new crypto bill comes when the crypto industry faces regulatory challenges in other countries, following Terra Luna’s and FTX’s collapse.
Background: The Terra Luna Collapse and FTX
In May 2022, the world saw its largest crypto crash at the time, with the collapse of Terra Luna. The collapse, disproportionally impacting South Korea, led to an estimated $60 billion wipeout in crypto assets. Its controversial founder, Do Kwon, fled the country after its collapse.
What is more, the Terra Luna collapse contributed to the eventual demise of FTX. The collapse of Terra Luna and UST led to trading losses for Alameda, FTX’s sister firm. Due to Alameda’s comingling of funds with FTX, the Terra Luna collapse directly impacted FTX.
In response to these crises, global authorities are tightening their supervision over cryptocurrency. The U.S. Treasury has emphasized the need for the U.S. to work with other countries to create a unified approach to crypto regulation. Similarly, lawmakers in Congress are considering how to regulate the crypto industry in the wake of the FTX collapse.
On the Flipside
- South Korea’s requirement for digital asset companies to insure customer funds and maintain reserve capital could pose a challenge for smaller companies.
- Some crypto companies like Coinbase claim that the regulatory crackdown that has come into force since the fall of FTX is detrimental to innovation.
Why This Matters
South Korea’s bill could lead to increased investor confidence in the crypto market, potentially attracting more traders to the region.
Read more about the spectacular collapse of Terra Luna:
Read about Fidelity’s case for why we need Spot Bitcoin EFTs